INDIA
21 September 2014
Creating shared value
Can business and society work together to foster each other’s prosperity? Those who believe so tend to espouse corporate social responsibility, write Asit K. Biswas and Andrea Lucia Biswas-Tortajada.
Can business and society work together to foster each other’s prosperity? Those who believe so tend to espouse corporate social responsibility (CSR), write Asit K. Biswas and Andrea Lucia Biswas-Tortajada.
But critics have said many CSR activities are superficial public relations activities and that a company’s primary purpose is to serve the interests of its shareholders. Indeed, Nobel Prize winner Milton Friedman once said the only social responsibility of business was to increase profits.
Yet, some big firms and business leaders have managed to bridge the divide by developing sector-, company- and location-specific models to contribute to good shareholder returns and concurrently ensure the prosperity of the community in which they operate. This form of CSR has a catchy new name: CSV, or creating shared value.
So, how does CSV work? Take Moga, a small municipality in Punjab, where Nestle built its first factory in India in 1958. Then, the government had banned imports of milk powder and milk products to conserve foreign exchange and kick-start domestic production capacity. As part of a national import substitution industrialisation push, the firm was invited to establish a 11,000 sq km milk district in a place of abject poverty, widespread malnutrition, poor living conditions and zero milk culture.
It was probably the last place where a foreign investor could succeed. Starting from scratch, Nestle had to overcome massive infrastructural, production and cultural challenges to have a chance of making it. Yet, over the past five decades, the firm has helped revolutionise dairy farming in Moga. Over time, dairy farming went from being a marginal activity for supplementing household nutrition to an organised, profitable economic activity. Reliable milk collection systems were established, strict and transparent quantity and quality standards were set and competitive and profitable rates were paid regularly to supplying farmers. It was clearly no mean feat of local cluster development.
On Nov 15, 1961, the factory’s opening day, 511kg of milk was collected. After one full year of operation, the factory could purchase only 2,054 tonnes. Ten years later, it was 26,660 tonnes.
Gradually, dairy farmers benefited as productivity, yields and income increased and a reliable milk supply system was built. Today, Nestle pays its farmers more than 6 billion rupees (S$124 million) each year for 350 million kg of milk, and the diary products it manufactures are exported to other Indian states and abroad.
The creation of this new income-generating activity in Moga has reshaped its social, economic, environmental and fiscal landscape. Payments for milk to farmers, which grew from 910,000 rupees in 1962 to 6,120 million rupees in 2011, have had a 3.5 multiplier effect in ancillary and productive activities. Farmers’ higher disposable income has increased their spending capacity and the aggregate demand for additional goods and services.
The factory today employs 2,400 people and supports another 86,371 jobs indirectly. Taxes levied on imported inputs by the milk factory contribute to 25 to 35 per cent of the total income of Moga.
Transforming a society takes time, and so does having a positive, lasting impact. It has taken 50 years of continuous work, commitment, investment and innovation to transform Moga into a thriving milk district. Nestle’s engagement there presents a pioneering case of how a company can position itself at the forefront of the food industry, successfully building and expanding markets, developing quality and innovative products and enlarging secure value chains.
All these can be achieved while advancing the livelihood of hundreds of thousands of families in an area that used to be one of the most impoverished in Punjab.
Building a community of interests, firms, farmers, workers, ancillary companies and local consumers can transform underdeveloped regions such as Moga into an economically, socially and environmentally better place to live in for suppliers and consumers, while bringing profits to the firm. This is what creating shared value is about.
Businesses will still be businesses and they will always be preoccupied with increasing profits. Yet, the path they follow to growing profitability has begun to change. As the example of Nestle shows, firms will do good insofar as their host communities also do well.
This article is based on their latest book, Creating Shared Value: Impacts Of Nestle In Moga, India.
This article was first posted in TODAY on 2 September 2014
But critics have said many CSR activities are superficial public relations activities and that a company’s primary purpose is to serve the interests of its shareholders. Indeed, Nobel Prize winner Milton Friedman once said the only social responsibility of business was to increase profits.
Yet, some big firms and business leaders have managed to bridge the divide by developing sector-, company- and location-specific models to contribute to good shareholder returns and concurrently ensure the prosperity of the community in which they operate. This form of CSR has a catchy new name: CSV, or creating shared value.
So, how does CSV work? Take Moga, a small municipality in Punjab, where Nestle built its first factory in India in 1958. Then, the government had banned imports of milk powder and milk products to conserve foreign exchange and kick-start domestic production capacity. As part of a national import substitution industrialisation push, the firm was invited to establish a 11,000 sq km milk district in a place of abject poverty, widespread malnutrition, poor living conditions and zero milk culture.
It was probably the last place where a foreign investor could succeed. Starting from scratch, Nestle had to overcome massive infrastructural, production and cultural challenges to have a chance of making it. Yet, over the past five decades, the firm has helped revolutionise dairy farming in Moga. Over time, dairy farming went from being a marginal activity for supplementing household nutrition to an organised, profitable economic activity. Reliable milk collection systems were established, strict and transparent quantity and quality standards were set and competitive and profitable rates were paid regularly to supplying farmers. It was clearly no mean feat of local cluster development.
On Nov 15, 1961, the factory’s opening day, 511kg of milk was collected. After one full year of operation, the factory could purchase only 2,054 tonnes. Ten years later, it was 26,660 tonnes.
CREATING A MILK INDUSTRY IN MOGA
To achieve this increase, Nestle had to take actions it had never tried before. The company began providing free animal husbandry advice and credit and nominal cost services to farmers, whether they supplied milk to Nestle or not. The firm also convinced farmers to move from low-yielding buffaloes to higher-yielding cows.Gradually, dairy farmers benefited as productivity, yields and income increased and a reliable milk supply system was built. Today, Nestle pays its farmers more than 6 billion rupees (S$124 million) each year for 350 million kg of milk, and the diary products it manufactures are exported to other Indian states and abroad.
The creation of this new income-generating activity in Moga has reshaped its social, economic, environmental and fiscal landscape. Payments for milk to farmers, which grew from 910,000 rupees in 1962 to 6,120 million rupees in 2011, have had a 3.5 multiplier effect in ancillary and productive activities. Farmers’ higher disposable income has increased their spending capacity and the aggregate demand for additional goods and services.
The factory today employs 2,400 people and supports another 86,371 jobs indirectly. Taxes levied on imported inputs by the milk factory contribute to 25 to 35 per cent of the total income of Moga.
Transforming a society takes time, and so does having a positive, lasting impact. It has taken 50 years of continuous work, commitment, investment and innovation to transform Moga into a thriving milk district. Nestle’s engagement there presents a pioneering case of how a company can position itself at the forefront of the food industry, successfully building and expanding markets, developing quality and innovative products and enlarging secure value chains.
All these can be achieved while advancing the livelihood of hundreds of thousands of families in an area that used to be one of the most impoverished in Punjab.
Building a community of interests, firms, farmers, workers, ancillary companies and local consumers can transform underdeveloped regions such as Moga into an economically, socially and environmentally better place to live in for suppliers and consumers, while bringing profits to the firm. This is what creating shared value is about.
Businesses will still be businesses and they will always be preoccupied with increasing profits. Yet, the path they follow to growing profitability has begun to change. As the example of Nestle shows, firms will do good insofar as their host communities also do well.
Acknowledgements
Asit K Biswas is distinguished visiting professor at the Lee Kuan Yew School of Public Policy and co-founder of the Third World Centre for Water Management in Mexico, where Andrea Lucia Biswas-Tortajada is a senior research fellow.This article is based on their latest book, Creating Shared Value: Impacts Of Nestle In Moga, India.
This article was first posted in TODAY on 2 September 2014
REFERENCES:
- Creating shared value by Asit K. Biswas and Andrea Lucia Biswas-Tortajada. TODAY, 2 September 2014.- Asit K. Biswas, Founder, Third World Centre for Water Management. Distinguished Visiting Professor at the Lee Kuan Yew School of Public Policy.
- Third World Centre for Water Management, Mexico
- Asit K. Biswas. Distinguished Visiting Professor at the Lee Kuan Yew School of Public Policy.